A Sound Strategy for Investing India In 2015

India better get ready for its close-up. Obama’s high-profile visit is helping propel the conversation about investing in India.

The U.S. and India trade relationship has been muted for several years now. But after India’s prime minister—Narendra Modi—welcomed President Obama with a “bear hug”this week, a new world order could be in effect.

A strengthening of relations between the U.S. and India will be big positive for the world’s second most populous country, most of which is impoverished.

With that in mind, is there a way for investors to profit? I certainly think so.

India, which has more young people than old people, will be an economic force over the next decade. The big winners will be companies that benefit from India’s rising middle class, such as banks and automakers.

But before we get into which stocks I think will perform the best, let’s consider why Obama’s trip to India was so monumental.

Obama spent three days in India with Modi this week laying the groundwork to strengthen economic ties between India and the U.S. He becomes the first U.S. president to be the chief guest at India’s Republic Day parade. He’s also the first president to visit India twice while still in office.

To me, two things stand out from this trip.

First, it brings India to the forefront of the global trade stage. Second, it highlights that India finally has a prime minister in Modi that’s receptive to strengthening India’s relationship with America.

A strengthening of trade ties between India and the U.S. will be a win-win for both countries. On the U.S. side, it will mean opening trade with one of the fastest-growing countries in the world. Meanwhile, India would gain access to America’s military cooperation and technology, which will help spur economic growth.

But it also means that India (and even the U.S.) will be less reliant on China. India and China have had territorial disputes, as China has stepped up its military presence across Asia.

Plus, India appears to be a much more attractive trade partner for the U.S. as it is quickly closing in on China as the world’s most populous country. And unlike China, which is communist ran, India is a democracy.

While in India, Modi and Obama also signed a decade-long defense deal that deepens military-to-military engagement. This should help provide security stability in the East and allow India to better stand up against China.

We’re already seeing the benefits of Modi’s promises in the stock market.

The WisdomTree India Earnings Fund ETF (NYSEArca: EPI) is already up 9% year-to-date, while the S&P 500 is down 1%. This comes after the WisdomTree India ETF outperformed the S&P 500 by over 15 percentage points in 2014.

The big question for most investors is; will this type of outperformance continue in 2015?

The Indian market took off after Modi was elected prime minister in May. Modi, part of the pro-business party, won the election a landslide, signaling that the Indian people are starved for change. Modi ran on the promise to stimulate growth for the largely impoverished country.

And Modi is already delivering by reviving infrastructure projects and turning the focus toward areas that will boost economic growth in the country, such as defense.

With all of that in mind, here are the top three ways to play India this year:

Way To Play India This Year No. 1: ICICI Bank Ltd (NYSE: IBN)

ICICI has nearly 4,000 branch locations and generates about 85% of its profits from India. This bank has one of the biggest opportunities around, which includes tapping into India’s large unbanked population. ICICI also has a strong presence in insurance, which will also a benefactor of India’s growing middle class.

What’s more is that ICICI is expected to grow earnings by over 19% next year, which is more than any of the major global banks, like JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC). Its 30% return on equity towers above other banks and it also offers a 1.2% dividend yield.

Way To Play India This Year No. 2:Infosys Ltd (NYSE: INFY)

Infosys is an IT services company in India that will continue to benefit from the rise of offshore outsourcing. It already has a number of long-standing clients and plans on growing its top (revenue) and bottom (earnings) lines going forward.

On the top line, Infosys is hiring more salespeople to boost its international presence and develop new partnerships. On the bottom line, the IT company plans to cut costs and shift more of its business mix toward higher-margin services. Plus, it has no debt and pays a 1.4% dividend yield.

Way To Play India This Year No. 3: Tata Motors Limited (NYSE: TTM)

Last but not least is India’s largest commercial vehicle maker, Tata Motors. This company will benefit from the long-term demand of vehicles in India. In part, that’ll be driven by India’s commitment to infrastructure spending, which boosts commercial vehicle demand.

And on the other side, more roads will power passenger vehicle demand. There are only 20 vehicles per 1,000 people in India, leaving a big market opportunity for Tata.

For investors looking to take a broader approach to investing in India, consider the WisdomTree India ETF I mentioned above. Plus you’ll get access to various companies that only trade on the National Stock Exchange of India.

These include the energy and materials company, Reliance Industries Limited, the home lending business, Housing Development Finance Corp,and major commercial bank, State Bank of India.

In closing, Obama’s trip to India this week provided a lot of color and put the spotlight on India’s potential going forward. The U.S. will be a formidable partner in Modi’s quest to deliver the Indian people from poverty. And Modi, a former tea seller who has never held national office, appears to be just what the Indian people needed.

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